Reimbursable out-of-Pocket Costs

What Are Reimbursable out-of-Pocket Costs?

Reimbursable out-of-pocket costs are things that an employee pays for upfront and then are paid back for by their company. These out-of-pocket expenses are often work-related and may be tax-deductible for employees if they are not reimbursed.

Key Takeaways

  • Reimbursable out-of-pocket costs occur when you pay for something with your own money and they are paid back for those expenses.
  • These are often work-related and paid by employers for travel, lodging, certain healthcare expenses, office supplies, and so on.
  • Health insurers also sometimes require their customers to pay for services up-front, and then later reimburse them via a claims process.
  • With more employees working remotely since the start of the coronavirus pandemic, some out-of-pocket costs may include high-speed internet.
  • Your company will usually ask you to provide receipts for any reimbursable out-of-pocket expenses.

Understanding Reimbursable out-of-Pocket Costs

For example, if a salesperson drives to multiple locations each day to visit clients face-to-face, the amount spent on gas is a reimbursable expense. Sometimes, even wear-and-tear caused by excessive miles on a personal car being used for work will be paid back to an employee. It all depends on company policy. An employee can record the mileage and/or gas costs and submit proof to accounting for payment, or they can opt to use the deduction when filing next year’s taxes.

Reimbursable out-of-pocket costs can also occur when traveling. If part of a person’s job involves hopping on a plane and attending conferences throughout the year, expenses such as food, hotel, airfare, tips, etc., are often reimbursable. Some companies opt not to pay for alcoholic beverages; again, it’s a matter of policy.

Another situation that often requires out-of-pocket work purchases is when someone works from home, every day or a few days a week. Usually, a telecommuter walks into the local office supply store to buy items like print cartridges, paper, computer accessories, or downloads necessary applications online if a company does not provide them via a connected network and the help of IT.

Again, these costs are reimbursable unless an employee chooses to use them as deductions on next year’s taxes. When a company reimburses employees, it can deduct all costs as business expenses without impacting an individual’s taxes.

Another way companies handle expenses is by providing a corporate credit card in their name, and the balance is paid directly to the merchants.

Reimbursable Medical Expenses

Insurance companies often deal with doctors or service providers directly to handle payments for medical expenses. Still, occasionally, insurance policies will require the covered person to pay for the product or service upfront, then submit a receipt for reimbursement.

In the health insurance industry, out-of-pocket expenses refer to the portion of the bill that the insurance company doesn't cover and that the individual must pay on their own. Out-of-pocket healthcare expenses include deductibles, copays, and coinsurance.

Health insurance plans have out-of-pocket maximums. These are caps on the amount of money that a policyholder can spend each year on covered healthcare expenses. The Affordable Care Act (ACA) requires all group and individual plans to stay within annually updated guidelines for out-of-pocket maximums unless otherwise exempted.

For 2022, the out-of-pocket limits are $8,700 for individual coverage and $17,400 for family coverage. While plans can't have out-of-pocket maximums higher than these limits, many offer lower maximums.

Advantages and Disadvantages of Reimbursable Medical Expenses

Some advantages of reimbursable medical expenses include getting money back after paying out of pocket for a medical expense. Insurers will pay patients back for their costs. It is a way of savings, as the reimbursement is usually mailed out a few weeks after the payment is made.

The disadvantages include that the high cost of medical expenses may cause financial stress on individuals or families.

Out-of-Pocket vs. Deductible

Out of pocket is the maximum amount of money you have to pay for medical care for the year. Out-of-pocket costs include deductibles and co-pays for doctor visits. A deductible is an amount of money you have to pay yourself out-of-pocket until your health insurance company pays for your care.

Employee Responsibilities

Employees should keep accurate daily records of expenses and provide receipts on forms provided either by their companies or online and turned into the accounting department on a predetermined schedule. All mileage should be logged, including odometer readings, dates, and locations. Commuting miles, however, are not reimbursable.

In many cases, it’s beneficial and easier for both parties if an employer pays for expenses ahead of time. It can save accounting time and prevent an employee from spending personal money on business when it might be a hardship.

A reimbursable out-of-pocket cost for a sales representative could be a restaurant bill from courting a potential client or the cost of gas to drive to a sales course in a neighboring city. Most companies have guidelines to help employees determine what expenses are considered reimbursable out-of-pocket costs and not. Usually, employees will have to retain receipts and give detailed explanations for their purchases.

What Qualifies as an out-of-Pocket Medical Expense?

An out-of-pocket medical expense is any medical care you pay for that is not covered by your insurance policy, or is a co-pay or deductible as set up by your insurance company.

How Do I Calculate My out-of-Pocket Medical Expenses?

Because out-of-pocket costs are not reimbursed, or paid, by your health insurance company, it can be tricky to calculate your annual expense. A good start is to look at your deductible—what you will owe before your insurance kicks in, and add in your annual copays. The total of these items is a good start to calculating your out-of-pocket expenses.

How Can I Reduce My out-of-Pocket Medical Expenses?

There are several ways to reduce out-of-pocket medical spending from using in-network doctors, carefully reading bills for mistakes, asking for discounts from your providers, and using generic prescription medication.

What Is a Reimbursement Plan?

A reimbursement plan is a written set of rules and guidelines outlining an employer's reimbursement policies. This document provides employees with information on the types of work-related expenses that can be reimbursed. It explains the procedures for submitting expenses for reimbursement and describes how and when the employer will reimburse the employee.

Are Reimbursable Expenses Tax Deductible?

Employers are allowed to deduct reimbursements of certain business expenses. According to the IRS, a business expense must be both ordinary and necessary to be deductible. Ordinary expenses are accepted and common for a specific industry. Necessary expenses are appropriate and helpful for a business or trade.

How Does a Health Reimbursement Arrangement (HRA) Work?

A health reimbursement arrangement (HRA) is a group health plan paid for by an employer. Under the plan, the employer reimburses employees for their qualified medical expenses. The employee incurs the medical expense first and then applies for reimbursement from the employer.

If the medical expense is covered, the employee will be reimbursed tax-free up to a fixed dollar amount. The employer decides how much to put into the plan and establishes a fixed amount available for reimbursement to the employee per year. Some HRAs will allow unused amounts to roll over to the following year.

Article Sources
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  2. Office of the Legislative Counsel. “Compilation of Patient Protection and Affordable Care Act,” Page 31. 

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  5. Internal Revenue Service. "Publication 535, Business Expenses," Page 3.

  6. "Health Reimbursement Arrangements (HRAs): 3 Things to Know."